A high employment-low wage society: a deal with the devil?

And so the ‘productivity puzzle’ continues. Earlier this week the ONS published new figures showing that employment rose by 154,000 in the last quarter of 2012, taking up the total increase over the year as a whole to half a million. This is despite growing expectations that Britain will slide back into recession for the third time since the economic downturn. Indeed, the size of the economy in the last quarter was the same as it was a year beforehand. So what’s going on?

Up until fairly recently, most commentators have put the low growth-high employment phenomenon down to the increasing number of part-time positions made available, at the expense of full-time ones. The argument runs that the number of people in work may not have fell so sharply as expected, but the number of hours worked certainly will have done. This may have been true at the outset of the recession, but the latest tranche of ONS figures now seems to contradict this claim. The number of full-time workers increased by 197,000 in the last quarter, whereas the number of part-time ones fell by 43,000.

The real reason why employment rates have remained so buoyant is rather down to a squeeze on wages, particularly for those in lower skilled jobs. Average earnings have risen by only 1.3 per cent since a year ago, whereas inflation is more than double this. Nor is this a recent phenomenon. The Institute for Fiscal Studies, for instance, reported that in the 3 years leading up to 2010-11, average household income (pre-tax and benefit) fell by 7 per cent in real terms. Wages now only represent 53 per cent of GDP, down from 65 per cent in the mid-1970s.

This begs the question of whether low wages are a price worth paying for low unemployment. Or to put it a different way, can we live with inequality, if it means having more people in work? Speaking yesterday at the RSA, the economist and author Stuart Lansley reported that this is exactly the trade-off that Bill Clinton and Tony Blair contemplated during their time in office in the late 90s. Either they were to create high-skilled economies and societies based on efficiency, or they deregulate, pare back the state and settle for a highly competitive market economy grounded in flexible labour (with inevitable by-product of inequality). The rest is history.

While some may view this as a necessary deal with the devil, in reality it is no such deal at all. The benefits have been revealed as a myth, the silver linings of inequality as an illusion. Take poverty, for instance. As a result of the squeeze on wages, it is now the case that there are more children in poverty who are living in working households than there are living in workless ones. The damage being inflicted on families was masked throughout the early 2000s by an increasing reliance on credit. The consequence is that now something like a third of family income among low earners is spent on debt repayment.

As Lansley pointed out yesterday, this is not just bad for the individuals directly concerned, it is also for the wider economy. Demand contracts, the economy grinds to a halt, and we ‘lose’ a decade or more of prosperity through stasis. Moreover, the inequality created by low skilled, low wage jobs induces societal fragmentation, distrust and intermittent bursts of anger from the most dispossessed.

So what is the way forward? High quality jobs that pay a decent wage is a good starting point. For those who say that businesses can ill afford it, the Resolution Foundation has argued persuasively that average wage bills for the larger companies would increase by only a few per cent. By implementing a system along the lines of the Living Wage, they may even benefit by way of increased productivity and retention rates. Indeed, this is the rationale for the ‘Living Wage City Deals’ being proposed by some.

Yet we have to do more than just fiddle with wages. We need a root and branch rethink about the kind of society we want to live in, and the type of economy and workforce we want to build. Some like Will Hutton, for instance, have mooted the idea that we should follow a model of ‘flexicurity’, whereby flexibility for employers is matched with high quality jobs that are backed by a strong system of education and welfare protection. Labour’s announcement today that they are considering implementing a ‘contributory principle’ for unemployment benefits suggests this is finally being taken seriously.

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Alas, if only Blair and Clinton had followed Germany's model and had focused on a high skill economy.

Sacrificing short term growth through reduced consumption of Chinese goods and rejecting the boom in personal debt funded by Rick Rubin's pals in Wall Street and Greenspan's low interest rates that was echoed in London.

Perhaps its something to do with the Anglo-Saxon model of individualism (or as Oliver James would put it 'selfish capitalism') that Germany resisted. Although the Greeks got caught worse than most.

Anyway, aiming for GDP growth is the wrong target anyway, and the UK should really aim at a prosperity rather than growth, and get ahead of the curve.

Tigrovic

26th February 2013

and last but not least: imagine if we just could erase the word 'unemployement' from our dictionaries? what kinda effect would this mass-psychologically have? (especially thinking of the sick unempoyment rates, especially among the youth (18-25 year olds) in southern european countries right now, especially greece, italy and spain) i could reasonably argue that even health care costs are likely to drop (maybe even significantly) through the societal change towards an unconditional basic income regime...

Tigrovic

26th February 2013

thank you perched in London for having mentioned the idea of an unconditional basic income! i dont think that it'll be this 'easy', speaking of raising wages through this concept... i'm afraid that corporations will most likely find ways of circumventing the effect you mentioned (since it also depends on the specific model of the ubi; f.e. who is entitled to it? everyone? nationality-based? if so, what about immigration? there are no easy answers here, sourrounding the ubi...) however: it's high time this idea is made broadly public and the possible effects are being discussed widely - again depending on the specific ubi model (how high or low would that payement be? in switzerland we are discussing a range from 600£ - 1500£ a month; but dont compare these numbers directly please, living costs are also significantly higher here, my point was about the possible range...) i'm absolutely in favor of the idea or the concept of it, even strongly suggesting that it should cover the basic needs (so sticking to the swiss numbers i would favor going for the highest reasonably possible amount) but it's effects need to be discussed and people usually are afraid of change in the meaning of an 'not-completely certain future'... btw: thank you RSA for 'drive - what motivates us' for proving that human motivation is not (only) about the money, IF your basic needs are granted... and they could be through the idea of an ubi... :)

cityeyrie

22nd February 2013

I really wish the ONS figures weren't so uncritically reported - many so called 'new jobs' are actually full-time placements via the many workfare programmes this and the previous government has introduced, and people aren't even getting the statutory minimum wage, to say nothing of a living wage. There are also a lot of reports of people being chivvied into 'self-employment' (also counting as a 'new job') while they actually live on tax credits and housing benefit - and are still open to constant harassment by the DWP.

What Labour is proposing is no solution, but a policy swizz. An unconditional basic income would make it possible for people to demand better wages for the jobs they do, while also supporting those who do the largely unpaid work of keeping their families, communities and society together.